March 31, 2009

High Demand Generates Quick Sale of C.U. Bonds

The University successfully sold $500 million in debt last week, as Cornell maintained its credit rating on one index but slipped a notch on another.
Investors fully subscribed to Cornell’s bond offerings in under 30 minutes last Thursday, according to Tommy Bruce, vice president of University Communications.
The bond offering was divided evenly between $250 million of 5-year bonds at a 4.35-percent interest rate and $250 million of 10-year at a 5.45-interest rate.
While the University has lines of credit and regularly sells-tax exempt bonds to finance construction, the sale of these taxable bonds are unusual. The magnitude of the offering is, in fact, unprecedented.
The sale was Cornell’s largest offering of taxable bonds and the first such sale in a decade, according to Bloomberg.
The University also announced yesterday that it plans to sell $305 million of tax-exempt bonds to pay for “capital projects already in progress.”
On the same day that Cornell successfully sold its bonds, Standard & Poor’s Ratings Services announced that it lowered the University’s long-term credit rating to “AA” from “AA+”. This change represents a slide of one interval on the service’s scale, of which “AAA” is the highest.
S&P reduced Cornell’s credit rating as a result of the University’s structural operating deficits and “significant debt.”
“The downgrade reflects near-term liquidity concerns, as evidenced by the need to issue long-term debt ($500 million) to meet working capital needs … a substantial $650 million increase in debt, and the resulting decline in financial resources relative to debt,” S&P stated in a press release last week.
S&P also noted that the University’s rating was only decreased by one notch because of its reputation, “impressive demand” for degrees, fundraising history and its “strong management team with solid planning and policy practices.”
A separate rating service, Moody’s Investors Service, maintained its “Aa1” credit rating for Cornell last Wednesday. Moody’s highest rating is “Aaa”.[img_assist|nid=36413|title=Cornell’s Bond Sale|desc=|link=node|align=left|width=|height=0]
“The University is heartened by the outcome,” Vice President for Communications Tommy Bruce said last night. “It is quite an endorsement to have your bonds subscribed in such short order. We deeply appreciate the vote of confidence and we’ll continue to make sure Cornell is viewed in such positive terms.
The Board of Trustees authorized the University to issue $500 million of debt following its meeting in Ithaca on March 6.
“We’re trying to be prudent in how much additional debt we take on by selling these bonds,” President David Skorton said earlier this month. “We want to find a sweet spot: on the one hand, having the additional funds that [we need] … but on the other hand not selling more than we need.”
Cornell’s decision to sell bonds follows the trend among other Ivies to increasingly use bond proceeds to fund operations in light of shrinking endowments. Earlier this year, Harvard sold about $1.5 billion of debt and Princeton sold $1 billion of debt, according to Bloomberg.
With the issuance of the bonds last week, the University is now approximately $1.7 billion in debt, according to the S&P press release.

Editor’s note: An earlier version of this article incorrectly stated Cornell’s total debt as $1.7 million. It is, in fact, $1.7 billion.

Related

The University, in an attempt to maintain economic buoyancy, has had to reduce the variety of services offered, often to the chagrin of the students. One recent example was the closing of the Physical Sciences Library in Clark Hall, which generated much backlash from concerned students. The decision to close the library at the end of 2009 was made in early March by the University Library System in an effort to minimize its sizeable deficit.

When the University decided that it would take on $500 million in debt to raise liquidity on March 6, Cornell’s financial officers went to work picking a date during which the bonds would fetch the best interest rate in this dramatically fluctuating market. The coupon rate, or rate of interest on which the bonds sell, depends heavily upon events like release of jobless rates, corporate earnings reports, other assets being sold that day and religious holidays, according to Joanne DeStefano, vice president of finance.